ICU Seen Extending Record With 21% Deal Premium: Real M&A

ICU advanced 13 percent May 8 to close at a high of $68.83 after people familiar with the matter said the company is working with JPMorgan Chase & Co. on finding suitors. Photographer: Scott Eells/Bloomberg

May 10 (Bloomberg) -- ICU Medical Inc., the maker of
intravenous medical equipment that surged to a record this week
after Bloomberg News said it’s considering a sale, could fetch
21 percent more in a takeover.

ICU advanced 13 percent May 8 to close at a high of $68.83
after people familiar with the matter said the company is
working with JPMorgan Chase & Co. on finding suitors. While the
gain left San Clemente, California-based ICU near its highest
valuation relative to profit in almost five years, it’s still
cheaper by that measure than most other U.S. medical device or
equipment makers bigger than $500 million, according to data
compiled by Bloomberg.

Roth Capital Partners LLC and CJS Securities Inc. said ICU
should be valued at about $80 a share or more in a sale,
implying a 21 percent premium to yesterday’s price. The $964
million company’s operating margin in the past year exceeded the
industry median, and it’s projected to post record revenue and
net income in 2014, data compiled by Bloomberg show. With no
debt and the ability to generate cash from sales of disposable
IV connectors, ICU could attract private-equity firms, as well
as larger medical-device makers, said CJS Securities.

“We’ve always viewed them as a potential target,” Matt
Dolan, a Newport Beach, California-based analyst at Roth
Capital, said in a telephone interview. “Not only do they have
decent revenue, but they also have a pretty good profit profile.
I can see why it would be attractive.”

Tom McCall, a spokesman for ICU, said the company doesn’t
comment on market speculation. A JPMorgan representative also
declined to comment this week.

Drug Delivery

ICU makes devices used in drug infusions, such as needle-free IV connectors. The equipment lets doctors or nurses attach
the feed from a saline bag or a dose of medicine into a
patient’s IV port without the risk of being pricked by a needle
and contracting a disease. Its Clave product line accounted for
about 37 percent of last year’s $317 million of sales, and its
largest customer is Hospira Inc., whose IV sets use ICU’s
connectors, according to a regulatory filing.

Chairman and Chief Executive Officer George “Doc” Lopez,
who founded ICU in 1984, may be among the beneficiaries of a
sale. The 64-year-old is the company’s biggest shareholder, with
an 11 percent stake that was valued at about $106 million
yesterday, according to data compiled by Bloomberg.

Deliberations are in the early stages and ICU is still
gauging interest, people familiar with the matter, who asked not
to be identified because the process is private, said this week.

Sale Motivation

Lopez may have been prompted to consider a sale because
high asking prices have likely prevented him from spending ICU’s
growing cash hoard on acquisitions, said Lawrence Solow, an
analyst at CJS Securities in White Plains, New York. ICU’s cash
and equivalents totaled a record $234 million last quarter, data
compiled by Bloomberg show. Lopez also doesn’t have an obvious
successor should he want to retire, Solow said.

“They have stated publicly that the way to exist is to go
out and acquire or get acquired,” he said in a phone interview.
“They have a growing chest of cash and haven’t been able to
find an acquisition that they truly like, so maybe at the end of
the day they’re just going to say, ‘Let’s see if we can get
acquired and go that route.”’

ICU shares have risen 8.2 percent since Bloomberg News’s
report and may command even more in a takeover. Solow estimates
a fair offer to be $80 to $85 a share, based on applying a
multiple of 10 to his estimate of about $100 million of earnings
before interest, taxes, depreciation and amortization for ICU
next year. That would give ICU an equity value of about $1.2
billion.

Revenue Stream

People familiar with the matter said this week that the
company is weighing a sale that may fetch more than $1 billion.

Roth Capital’s Dolan said a so-called strategic buyer, such
as a large medical-device maker or medical-products distributor,
could pay about $80 to $82 a share. Companies within the
industry can probably afford to pay more than private-equity
firms because of the potential for so-called synergies, he said.
ICU’s stock closed at $66.10 yesterday.

Today, ICU’s shares climbed 1.7 percent to $67.25.

Part of ICU’s appeal is its profitability and recurring
revenue stream, Dolan said. Hospitals need to constantly reorder
products such as ICU’s connectors because they’re discarded
after a patient uses them.

ICU earned almost 20 cents in operating profit for each
dollar of sales in the past year, while the industry’s median
margin is 14 cents, according to data compiled by Bloomberg.

Buyout Appeal

ICU’s ratio of enterprise value to trailing 12-month Ebitda
rose May 8 to 9.5, approaching the highest level since 2008,
data compiled by Bloomberg show. Yesterday, it still had a lower
valuation than 83 percent of the industry.

The device maker’s free cash flow may lure financial
buyers, said Alexander Yaggy, a New York-based money manager at
Cortina Asset Management LLC, which oversees about $2.5 billion,
including ICU shares. Still, Yaggy said he’d rather see the
company return cash to shareholders than risk selling itself too
cheaply and not get credit for the cash.

“This is a case where I think a material special dividend
would be more appropriate perhaps than an outright sale,” he
said. Returning the cash to shareholders “would result in a
more optimal capital structure for the company and a less risky
position for the outside shareholders.”

At the same time, CJS Securities’ Solow said that ICU has a
lot of attributes that make it an appealing target and that
Lopez may expect the company to fetch an attractive valuation in
a sale.

“It’s been trading at a discount to the group, it’s
underlevered, and it spits off a lot of cash per year,” Solow
said. A strategic buyer “could keep them as an arm of the
company, but it’s also just as likely to be private equity.”